Gold And Silver - Follow What The Market Says, Not What Others Say About The Market

The article title is a wise message from a voice in the past. The best way
to follow what the market says is to read its net effect as derived from the
collective of all market participants that have made a buy or sell commitment.
If it does not show up in the chart, then what is being expressed is an opinion
about the market.

When one takes this approach, letting the market lead, there is no need to
wonder what to do next. Present tense developing market activity, combined
with a fixed set of trading rules is all that is needed. It is then a relatively
simple matter of viewing a market from different time frames to see what is
being "said." We like to start with a monthly to know what the prevailing
forces are doing because higher time frames tell what "smart money" is doing.

Whenever you see an unusually wide range bar, pay attention for it can be
making an important statement. Very often, a wide range bar will lead to a
trading range, bound by the high and low of the bar. We see that has been
the case in gold for the past 16 months. The unanswered question is, are we
seeing distribution that will lead to lower prices, or is this re-accumulation
in preparation to go higher?

The answer to that question will come from reading clues left behind by market
activity. If an answer is not apparent, and many times it is not, then more
information is needed, and it will come. This is where patience is required,
not trying to anticipate what may happen, but wait for clearer direction.
The market never disappoints.

One observation is how the past four months are more of a labored decline,
no wide range bars down like we saw back in September and December of 2011.
We have commented about this before: four months down, correcting the previous
two rally bars. The market is taking twice as long to retrace past gains,
without fully retracing the entire gain.

Markets are replete with logic. In a horse race, if one horse covers ground
from point A to point B, and another horse runs the same course but takes
twice as long to get from point B not quite to point A, which horse is showing
the most promise?

Once you see a "story" develop in the higher time frame, it is easier to then
look at it from a more detailed perspective. The weekly provides the same
information but with more focus. We learn that the market is most recently
in a down trending channel within a trading range that is also within a much
larger trading range, a bit like Russian nesting dolls.

The message is clear, and it is simple: There is no sign of a trend change
that would take price higher. Before gold can go to $2,000, $3,000 or wherever,
would you not agree it must first prove it can get above $1,800? This is not
a chicken/egg dilemma. Price right now is stuck on Marvin Gardens, not even
close to "Go."

From Monopoly we will switch to Aesop's Fable, The Ant and The Grasshopper.
In a trading range, the grasshopper is busy chasing up and down swings, while
the ant is busy preparing for what is to follow. How to best prepare? Read
the activity and see what the market is saying.

Most traders only look at daily charts and intra day time frames, a little
like a blind man trying to describe an elephant by touching a few parts of
its body. [Ugh! Will these analogies never end?! They do serve a purpose.]
If you looked only at this daily chart, you would not have as strong a sense
as to how much overhead resistance there is before a move of substance can
get underway. Still, we can see early clues before they show up on the weekly
and monthly charts.

The most important information we can see is how the downside thrusts are
making less progress by comparing the distance each swing low has made from
the last swing high. Here again, logic tells us if the effort expended to
go lower is making less and less progress, it is possible that sellers are
running out of the ability to keep price down. We see that at the last low,
3 on the chart.

The sharp increase in volume, and the location of the close tells us that
buyers were more in control than sellers, and price did rally from that low.
The "buyers" are most likely shorts covering, and maybe some bottom-pickers,
but it is not fresh new positions that are being established.

A point to make about the down channel: The upper line is solid, while the
lower line is partially broken. We did that so you can see how past action
can often lead you to where future action becomes important. The top line
is drawn across the swing highs of October and November. The lower channel
line is created parallel to the upper channel line, using the swing low between
the October/November highs as the anchor, and extending the line parallel,
into the future.

If you were to cover up the market activity to the right of the November high,
and see how the line from the November swing low is extended into the future
into January, and then uncover the price action since the November high, the
broken line was established before price activity lows of December and January.
The bottom channel line represents an oversold market condition. What is key
is to observe how price responds to it.

The reaction at 3 was relatively strong. Now, we get to watch how future market
activity develops within these chart contexts. The HOW of developing activity
will tell us what to expect, moving forward. For right now, the market is
not sending any clear signal that the current trading range is over. None.

As always, for buyers of physical gold, the timing is now, at any price.

We see a similar situation in silver, but from a slightly weaker condition.
The one plus to offer is the fact that over the last 16 months, sellers have
not been able to establish any important lower swing low.

We already know silver and gold are locked in a trading range. Still, gathering
information will help make a determination of what to do and, as importantly,
when. Trading ranges tell us the "when" is not now. [TR = Trading Range].

What to do is answered from the trading range clues, and the start is that
the TR began in a declining market. The failed retest rally high, August 2011,
led to a strong move lower in September, the wide range bar down. At some
point in the future, that high will be retested by buyers and defended by
sellers. How price responds in the retest will say a lot about the then market
strength or weakness. A horizontal line is drawn to show that price level
at a future time.

There was a retest of that decline at the end of October 2011, and a failed
probe at the end of February 2012. Markets are continually testing and retesting
important areas, and it is critical to observe how price responds, for that
is the market telling us whether a market is strong or weak. There are three
failed probes in the trading range, but there are also three successful holds
at the bottom of the trading range. We get know who will win the battle as
price moves farther along the Right Hand Side, [RHS] of the TR.

We do not yet know if the current retest of the August 2012 rally bar is significant,
so we watch it to see if price gains upside momentum, leading to a RHS breakout
of the range, or if price will retreat back and remain in the TR, or even
breakout to the downside.

Here is where it is important to watch what the market says and not what others
say about the market. All the clamor for higher silver prices is ignoring
what is going on in the present tense, and it says: silver ain't going anywhere
higher, yet. Put sentiment aside and deal with what is.

The daily picture echoes the higher time frames. The first possible glimmer
of a change in market behavior will come when price can rally above 31.50,
on wide ranges, strong closes, and increased volume, followed by a weak retest
that leads to another swing high.

There you have it in a nut shell.

Last month, we commented on our website that a low-end close on a wide range
bar can sometimes lead to a change. That was pointed out in a December Commentary,
[click on http://bit.ly/U285PF]. It was
a follow-up to the first reference to that kind of situation, a few days earlier,
[click on http://bit.ly/YmRoVb] for some
market insight. The failed probe lower, on volume second only to the December
low-end close, is a red flag for bears. We need to see more positive developing
market activity, like what was said in the above paragraph, to determine if
some kind of change may be starting.

Buy the physical, without concern. Wait on the futures. The market says so.

Michael Noonan is a Chicago-based trader with over 30 years in the business.
His sole approach to analysis is derived from developing market pattern behavior,
found in the form of Price, Volume, and Time, and it is generated from the
best source possible, the market itself.